Companies are building new factories again at a blistering pace and new output will send DRAM prices lower for the rest of the year

Prices of DRAM, the main memory chips used in personal computers, fell for the first time in over a year in June as companies increased production and PC vendors toughened their stance on further price increases.

The price declines are important for anyone looking for a new computer because high DRAM prices are among the reasons PC prices have been pushed higher for the first time in years. But the slide in chip prices signals a turn in the market. A shortage of the chips earlier this year caused chip makers to increase production, thereby easing the shortage. Now, analysts say, prices will slide for the rest of the year.

"Gartner expects to see mild ASP (average selling price) declines for the remainder of 2010," the market researcher said, noting that DRAM vendors will also be able to keep reducing costs so they can maintain healthy profit margins despite lower selling prices.

DRAM had become so expensive this year that the chips accounted for 15 percent of the materials cost in a midrange PC, said Gartner in its Semiconductor Monday DQ Report. The cost prompted PC vendors toughen their stance during negotiations with DRAM makers, the market researcher said, and a decline in DRAM spot prices helped PC vendors' cause as they sought lower prices.

DRAM is traded like a commodity due to the huge amount of the chips that are produced each year. Around 20 percent of the chips are sold in the spot market, while the remaining chips are sold via contracts with PC vendors.

Contract prices declined for mainstream 1Gb 1066MHz DDR3 DRAM chips (double data rate, third generation) to $2.40 at the end of last week, according to Gartner, while the spot price of the same chip dropped 0.4 percent to $2.71. Prices of the chips had hovered around $3.00 for much of April and May.

InSpectrum Technology, which operates an online DRAM exchange, predicts even lower prices for DRAM later this year. The company says that an aggressive spending plan by DRAM leader Samsung Electronics will put a lot more chips on the market and lead to sharp price declines later this year, especially late in the third quarter.

In May, Samsung doubled its projected spending on new DRAM production lines this year to 11 trillion Korean won ($9.7 billion) from 5.5 trillion won previously. The company said it wanted to increase output to catch rising DRAM prices, but analysts say the production increases may also be aimed at hurting rivals. Samsung has weathered the global recession well compared to industry rivals. Last year saw major DRAM maker Qimonda file for bankruptcy, while Taiwanese DRAM makers Powerchip Technology (formerly Powerchip Semiconductor) and ProMOS Technologies sought government assistance.

The result of competition among DRAM makers should be lower DRAM prices, and that will bring a rare respite from the factors that are pressuring PC prices to rise. DRAM has only been one of the components to become more expensive this year amid strong PC demand. Others including LCD screens, printed circuit boards, power management chips and heat management components.